Houghton Combination

12 Months Ended

Dec. 31, 2019

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

Note 2 – Business Combinations

Houghton

On August 1, 2019, the Company completed the Combination with Houghton, whereby the Company acquired all of the issued and outstanding shares of Houghton from Gulf Houghton Lubricants, Ltd. and certain other selling shareholders in exchange for a combination of cash and shares of the Company’s common stock in accordance with the share purchase agreement dated April 4, 2017. Houghton is a leading global provider of specialty chemicals and technical services for metalworking and other industrial applications. The Company believes that combining Quaker’s and Houghton’s products and service offerings will allow Quaker Houghton to better serve its customers in its various end markets.

The Combination was subject to certain regulatory and shareholder approvals. At a shareholder meeting held during 2017, the Company’s shareholders approved the issuance of new shares of the Company’s common stock at closing of the Combination. Also in 2017, the Company received regulatory approvals for the Combination from China and Australia. The Company received regulatory approvals from the European Commission (“EC”) during the second quarter of 2019 and the U.S. Federal Trade Commission (“FTC”) in July 2019. The approvals from the FTC and the EC required the concurrent divestiture of certain steel and aluminum related product lines of Houghton, which were sold by Houghton on August 1, 2019 for approximately $37 million in cash. The final remedy agreed with the EC and the FTC was consistent with the Company’s previous expectation that the total divested product lines would be approximately 3% of the combined company’s net sales.

The following table summarizes the fair value of consideration transferred in the Combination:

Cash transferred to Houghton shareholders (a)		$	170,829
Cash paid to extinguish Houghton debt obligations			702,556
Fair value of common stock issued as consideration (b)			789,080
	Total fair value of consideration transferred	$	1,662,465

(a) A portion is held in escrow by a third party, subject to indemnification rights that lapse upon the achievement of certain milestones.

(b) Amount was determined based on approximately 4.3 million shares, comprising approximately 24.5% of the common stock of the Company at closing, and the closing price per share of Quaker Chemical Corporation common stock of $182.27 on August 1, 2019.

The Company accounted for the Combination under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, at their fair value on the acquisition date. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. The determination of the estimated fair value of assets acquired, including indefinite and definite-lived intangible assets, requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. Fair values were determined by management, using a variety of methodologies and resources, including external independent valuation experts. The valuation methods included physical appraisals, discounted cash flow analyses, excess earnings, relief from royalty, and other appropriate valuation techniques to determine the fair value of assets acquired and liabilities assumed.

The following table presents the current preliminary estimated fair values of Houghton net assets acquired:

		August 1, 2019		Measurement
		(as Initially		Period		August 1, 2019
		Reported)		Adjustments		(as adjusted)
Cash and cash equivalents		$	75,821	$	—	$	75,821
Accounts receivable, net			179,745		(823)		178,922
Inventories, net			95,193		—		95,193
Prepaid expenses and other assets			11,373		(721)		10,652
Deferred tax assets			8,703		(8,703)		—
Property, plant and equipment			125,099		(9,570)		115,529
Right of use lease assets			10,747		(74)		10,673
Investments in associated companies			69,683		(3,236)		66,447
Other non-current assets			1,368		3,342		4,710
Intangible assets			1,022,500		5,900		1,028,400
Goodwill			483,921		10,994		494,915
	Total assets purchased		2,084,153		(2,891)		2,081,262
Short-term borrowings, not refinanced at closing			9,297		—		9,297
Accounts payable, accrued expenses and other accrued liabilities			152,829		(2,751)		150,078
Deferred tax liabilities			213,779		(8,697)		205,082
Long-term lease liabilities			6,655		(48)		6,607
Other non-current liabilities			39,128		8,605		47,733
	Total liabilities assumed		421,688		(2,891)		418,797
	Total consideration paid for Houghton		1,662,465		—		1,662,465
	Less: cash acquired		75,821		—		75,821
	Less: fair value of common stock issued as consideration		789,080		—		789,080
	Net cash paid for Houghton	$	797,564	$	—	$	797,564

As of December 31, 2019, the allocation of the purchase price for the Combination has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed. Houghton assets acquired and liabilities assumed have been assigned to each of the Company’s reportable segments on a specific identification or allocated basis, as applicable.

Accounts receivable, net, presented in the table above, including the measurement period adjustment recorded during the fourth quarter of 2019, represents the Company’s fair value estimate of receivables acquired, which includes the gross contractual receivables less the Company’s estimate of the amounts that will not be collected. See Note 13 of Notes to Consolidated Financial Statements. Measurement period adjustments recorded during the fourth quarter of 2019 related to deferred tax assets, deferred tax liabilities, other non-current assets and other non-current liabilities are primarily due to additional information obtained regarding certain tax audits, valuation allowances related to foreign tax credits and deferred taxes related to the step-up in intangibles and property, plant and equipment. See Note 10 of Notes to Consolidated Financial Statements. In addition, the Company recorded measurement period adjustments to accounts payable, accrued expenses and other accrued liabilities and other non-current liabilities, presented in the table above, primarily due to additional information obtained related to the projected obligations for certain environmental matters. See Note 26 of Notes to Consolidated Financial Statements. The measurement period adjustment recorded during the fourth quarter of 2019 related to property, plant and equipment presented in the table above is the result of additional information obtained related to the estimated fair value of certain real property acquired. Investments in associated companies presented in the table above, including the measurement period adjustment recorded during the fourth quarter of 2019, represents the Company’s fair value estimate of its 50% interest in a Houghton joint venture in Korea (“Houghton Korea”). The Company accounts for this interest under the equity method of accounting. See Note 17 of Notes to Consolidated Financial Statements. The Company allocated $1,028.4 million of the purchase price to intangible assets, including certain measurement period adjustments recorded during the fourth quarter of 2019, comprised of $242.0 million of trademarks and formulations, to which management has assigned indefinite lives; $677.3 million of customer relationships, to be amortized over 15 to 18 years; and $109.1 million of existing product technology, to be amortized over 20 years. In addition, the Company recorded $494.9 million of goodwill, including measurement period adjustments during the fourth quarter of 2019, related to expected value not allocated to other acquired assets, none of which will be tax deductible. See Note 16 of Notes to Consolidated Financial Statements. Factors contributing to the purchase price that resulted in goodwill included the acquisition of management, technology, intellectual property, business processes and personnel that will allow Quaker Houghton to better serve its customers. The expanded portfolio is expected to generate significant cross-selling opportunities and allow further expansion into certain emerging growth markets.

Commencing August 1, 2019, the Company’s Consolidated Statements of Income included the results of Houghton. Net sales of Houghton subsequent to closing of the Combination and included in the Company’s Consolidated Statements of Income were $299.8 million. The following unaudited pro forma consolidated financial information has been prepared as if the Combination had taken place on January 1, 2018. The unaudited pro forma results include certain adjustments to each company’s historical actual results, including: (i) additional depreciation and amortization expense based on the initial estimates of fair value step up and estimated useful lives of depreciable fixed assets, definite-lived intangible assets and investment in associated companies acquired; (ii) adoption of required accounting guidance and alignment of related accounting policies, (iii) elimination of transactions between Quaker and Houghton; (iv) elimination of results associated with the divested product lines; (v) adjustment to interest expense, net, to reflect the impact of the financing and capital structure of the combined Company; and (vi) adjustment for certain Combination and other acquisition-related costs to reflect such costs as if they were incurred in the period immediately following the pro-forma closing of the Combination on January 1, 2018. The adjustments described in (vi) include an expense recorded in costs of goods sold (“COGS”) associated with selling inventory acquired in the Combination which was adjusted to fair value as part of purchase accounting, restructuring expense incurred associated with the Company’s global restructuring program initiated post-closing of the Combination and certain other integration costs incurred post-closing included in combination and other acquisition-related expenses. These costs have been presented in the unaudited pro forma results as if they were incurred during the year ended December 31, 2018. Unaudited pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future for various reasons, including the potential impact of revenue and cost synergies on the business.

Unaudited Pro Forma	For the years ending
	December 31,
(as if the Combination occurred on January 1, 2018)	2019		2018
Net sales	$	1,562,427	$	1,654,588
Net income attributable to Quaker Chemical Corporation		94,537		35,337

Combination and other acquisition-related expenses have been and are expected to continue to be significant. The Company incurred total costs of $38.0 million, $19.5 million and $30.8 million for the years ended December 31, 2019, 2018 and 2017 related to the Combination and other acquisition-related activities. These costs included certain legal, financial and other advisory and consultant costs related to due diligence, regulatory approvals and integration planning as well as professional fees associated with closing the Combination. These costs also include interest costs to maintain the bank commitment (“ticking fees”) for the Combination during each of the years ended December 31, 2019 and 2018, accelerated depreciation charges during the year ended

December 31, 2019, and a gain on the sale of a held-for-sale asset during the year ended December 31, 2018. As of December 31, 2019 and 2018, the Company had current liabilities related to the Combination and other acquisition-related activities of $6.6 million and $8.2 million, respectively, primarily recorded within other accrued liabilities on its Consolidated Balance Sheets.

Norman Hay

On October 1, 2019, the Company completed its acquisition of the operating divisions of Norman Hay plc, a private U.K. company that provides specialty chemicals, operating equipment, and services to industrial end markets. The acquisition adds new technologies in automotive, original equipment manufacturer (“OEM”), and aerospace, as well as engineering expertise which is expected to strengthen the existing equipment solutions platform inside Quaker Houghton. The acquired Norman Hay assets and liabilities were assigned to the Global Specialty Businesses reportable segment. The original purchase price was 80.0 million GBP, on a cash-free and debt-free basis, subject to routine and customary post-closing adjustments related to working capital and net indebtedness levels. The Company expects to finalize its post-closing adjustments for the Norman Hay acquisition in the first half of 2020 and currently estimates that it will pay approximately 2.7 million GBP to settle such adjustments. The Company has accrued for this estimated additional purchase price as of December 31, 2019.

The following table presents the preliminary estimated fair values of Norman Hay net assets acquired:

Cash and cash equivalents		$	18,981
Accounts receivable, net			15,471
Inventories, net			8,213
Prepaid expenses and other assets			4,203
Property, plant and equipment			14,981
Right of use lease assets			10,608
Intangible assets			51,088
Goodwill			29,384
	Total assets purchased		152,929
Long-term debt included current portions			485
Accounts payable, accrued expenses and other accrued liabilities			13,488
Deferred tax liabilities			12,746
Long-term lease liabilities			8,594
	Total liabilities assumed		35,313
	Total consideration paid for Norman Hay		117,616
	Less: estimated purchase price settlement		3,287
	Less: cash acquired		18,981
	Net cash paid for Norman Hay	$	95,348

The Company allocated $51.1 million of the purchase price to intangible assets, comprised of $36.9 million of customer relationships, to be amortized over 13 to 17 years; $7.5 million of existing product technology, to be amortized over 20 years; $6.3 million of trademarks, to be amortized over 16 to 17 years; and $0.4 million of non-compete agreements, to be amortized over 2 to 11 years. In addition, the Company recorded $29.4 million of goodwill related to expected value not allocated to other acquired assets, none of which will be tax deductible. Factors contributing to the purchase price that resulted in goodwill included the acquisition of management, technology, intellectual property, business processes and personnel that will allow Quaker Houghton to better serve its customers.

As of December 31, 2019, the allocation of the purchase price for Norman Hay has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed.

The results of operations of Norman Hay are included in the Consolidated Statements of Income as of October 1, 2019. Transaction expenses associated with this acquisition are included in Combination and other acquisition-related expenses in the Company’s Consolidated Statements of Income. Certain pro forma and other information is not presented, as the operations of Norman Hay represent less than approximately 5% of the Company’s operations and are therefore considered not material to the overall operations of the Company for the periods presented.

Other Acquisitions

In March 2018, the Company purchased certain formulations and product technology for the mining industry for $1.0 million. The Company allocated the entire purchase price to intangible assets representing formulations and product technology, to be amortized over 10 years. In accordance with the terms of the applicable purchase agreement, $0.5 million of the purchase price was paid at signing, and the remaining $0.5 million of the purchase price was paid during the first quarter of 2019.

In December 2017, the Company acquired the remaining 45% ownership interest in its India affiliate, Quaker Chemical India Private Limited (“QCIL”) for 2,025.0 million INR, or approximately $31.8 million, from its joint venture partner, Asianol Lubricants Limited. QCIL sells products to the steel and metalworking industries in India and has associates based in various locations around India. The Company had been a joint venture partner in QCIL for 20 years. QCIL is a part of the Company’s Asia/Pacific reportable segment. As this acquisition was a change in an existing controlling ownership, the Company recorded $21.2 million of excess purchase price over the carrying value of the noncontrolling interest in Capital in excess of par value. In May 2017, the Company acquired assets associated with a business that markets, sells and manufactures certain metalworking fluids for its previous North America reportable segment for 7.3 million CAD, or approximately $5.4 million.